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Fitch: Commodity Prices Cloud DCP Midstream Outlook

Fitch Ratings cut its outlook to "negative" from "stable" on DCP Midstream LLC (DCPM) on concerns over low commodity prices and their impact on the company's cash flow, the ratings agency said Tuesday.

"As a gas processor, DCPM's cash flows are highly sensitive to crude oil, NGL [natural gas liquids] and natural gas prices," Fitch said. "As DCPM does not hedge its commodity price exposure, the recent decline in prices is expected to result in 2009 EBITDA [earnings before interest, taxes, depreciation and amortization] of less than half fiscal-2008 levels. As such, Fitch expects a significant weakening of credit metrics over the short to medium term."

DCPM is a 50-50 joint venture of ConocoPhillips and Spectra Energy Capital LLC. DCPM owns the general partner of DCP Midstream Partners LP, a midstream master limited partnership. Fitch affirmed DCPM's senior unsecured debt and issuer default rating (IDR) at "BBB+" and DCPM's short-term IDR at "F2," which applies to its commercial paper program. The rating action affects approximately $3 billion of debt at DCPM.

"While Fitch's ratings are based on historically normalized commodity prices, the current environment is well below the stress cases used in prior rating decisions," Fitch said. "Additionally, while DCPM's contract mix has historically mitigated some of its commodity price exposure with its bias toward percentage of proceeds contracts, the recent decline in natural gas prices and the long gas position caused by such contracts exposes DCPM to further commodity price risk."

The ratings agency warned that the "negative" outlook indicates the possibility of a negative rating action should commodity prices remain low for "a prolonged period" and/or if DCPM "should fail to live within the means of its cash flow during the current commodity environment."

The decision to affirm current ratings considers the fact that long-term cash flow performance is not predicated on the current commodity market, Fitch said. "Since DCPM is unhedged, there is no lag in profitability when and if commodity markets rebound," it said. "While it is obvious that cash flows are highly sensitive to declines in commodity prices, the reverse is also true and cash flows could improve to a large degree should economic conditions cause commodity prices to stabilize and/or improve."

Fitch noted that DCPM has enhanced its liquidity through short-term facilities and through the bond market. "Despite debt market weakness, DCPM has successfully issued debt twice over the past seven months, albeit at higher rates."

DCPM also recently sold an additional 25.1% ownership interest in DCP East Texas Holdings LLC to DCP Midstream Partners. Through the transaction, which was financed through the issuance of partnership units to DCPM, the partnership now owns 50.1% of the East Texas joint venture, with DCPM owning the remaining interest (see Daily GPI, April 3).

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